Chinese B Shares in Shanghai Stock Exchange

Investing in Chinese B Shares Listed in Shanghai Stock Exchange
Be Prepared, as They are at Multi-Year Lows

Currently, there are 55 listed companies in Shanghai B Share market, and 59 listed companies in Shenzhen B Share market. According to Jim Rogers, co-founder of Quantum Fund (with George Soros), many of the companies listed in the Chinese B Share market are not the kind of companies he would buy. When he invested in the fall of 1999, he left off “the inefficient holdovers from communist days, those giant labor-intensive companies that will never show a profit and whose going public was only a way of getting them off the government’s hands.” Today, using similar strategies, we will provide you with a list of quality B Share companies listed in Shanghai. In the next issue, we shall examine some of the B Share companies listed in Shenzhen.

SELECTING QUALITY COMPANIES

Selecting quality companies in the Shanghai B Share market is no easy task. First, many of the names of the companies can be deceiving. For example, there used to be one listed company named “China International Travel”. However, this company is not the nation wide company that operates travel packages and tours domestically and internationally. Instead, it was the Shanghai branch of “China International Travel”. Many Chinese companies use this name trick to “sound” better. Therefore, we aim to uncover the companies’ true identities.

Second, the management of the listed companies can be an uncertain factor for the companies’ earnings and dividend policies. All of the listed companies in China do not have a truly independent auditing company, nor have they third party outsiders to form a check and balance system within the companies’ managements. The company’s management level can fire their accounting firm at ease. They may also massage their earning figures or to sell additional shares to dilute shareholder’s rights. Therefore, in selecting quality companies, we investigate the companies’ past track records. For example, under normal circumstances, we would not include any companies that have sold additional shares that dilute shareholder’s rights.

Third, the relationship between the publicly listed entity and the parent company is frequently unclear. Many of the listed Chinese companies (such as XYZ Holdings) are stock holding companies of their parent company, usually called XYZ Group. Because of the fact that there is no true independent third party check and balance, and the fact that their parent company is not listed, the earnings of the listed entities are at the whim of their management levels. For example, to increase a listed company’s earnings, the parent company may “provide” many opportunities or projects for this listed entity to undertake. On the other hand, they may, for other reasons, decrease the listed company’s earnings by transferring assets or opportunities back to its parent company. Therefore, we will, within our abilities, conduct private investigations to these companies.

SELECTING PROCESS (Abridged)

Investing in B Shares Listed in Shenzhen Stock Exchange

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